The second administration of US President-elect Donald Trump began at noon on January 20. Trump’s relentless campaign since his loss to Joe Biden in 2020 suggests a more organized repeat of his first term, with the same emphasis on tax cuts to stimulate the economy, higher tariffs to change US trade with the world, and deporting as many immigrants as possible to create more opportunities for American workers. But times have changed, and the reality is unlikely to match the rhetoric.
In 2016, when Trump first won the presidency, the United States was experiencing a prolonged period of low inflation. The Federal Reserve has kept interest rates near zero throughout his tenure. This time, however, is very different. Inflation has risen sharply during the COVID pandemic, and the Fed is still wary of a rebound—which is why interest rates remain relatively high. Trump’s proposed tax cuts imply fiscal stimulus for an economy with low unemployment. Any signs of overheating will be met with tighter monetary policy.
Trump has threatened to replace Fed leadership, but he cannot fire Fed Chairman Jerome Powell without risking both higher long-term interest rates and higher inflation. There will be a tax cut in 2025, mostly for the wealthy, and the resulting loss of revenue will undermine long-term fiscal sustainability. Larger deficits will keep interest rates higher than they otherwise would be, and the dollar could strengthen, making it difficult for U.S. exporters and countries that have borrowed in dollars.
On tariffs, world leaders (and financial markets) have learned that Trump talks big but carries a small stick. He will no doubt loudly impose some high-profile tariffs, but U.S. business interests will immediately start looking for loopholes and lobbying for exemptions. Foreign leaders will go on a pilgrimage to Mar-a-Lago, play golf, and negotiate mutual concessions (we won’t tax your bourbon if you don’t tax our cognac, and we’ll buy more U.S.-made air defense systems).
Trump could ignore all these special requests and push for higher tariffs for everyone. But that will lead to more retaliation from trading partners and more protests from the big companies that now support him. The last thing Trump wants is to cause job losses at home, which could happen if U.S.-based companies have to pay more for imports and lose their competitiveness in export markets. If foreign leaders don’t make him look bad on the golf course and emphasize the jobs their companies are creating in the U.S. (especially in Republican-controlled states), everything will be subject to reasonable discussion.
On illegal immigration, Trump will certainly have an impact. The “border wall” is an illusion with no real meaning. But Trump is already threatening to punish Mexico and other countries (even Canada!) with high tariffs and other measures if they don’t keep immigrants out, and that will have some effect. Trump could also be wise to ease U.S. sanctions on Venezuela, which would allow more oil to be sold on the world market and help the Venezuelan economy. This would reduce pressure on Venezuelans to emigrate, while also putting pressure on Iran and Russia (both of which rely on oil sales to finance purchases of electronic parts from China for use in weapons).
Trump could go further, rounding up and deporting millions of people who are in the U.S. illegally. But mass deportations would hurt key sectors of the economy (such as agriculture and construction), cause massive social unrest, and force his business allies to cut back on investment (and job creation). Again, we should expect political grandstanding and sensational headlines, but the reality won’t change much (illegal immigration has already declined).
So what will Trump really do? Will he buy Greenland (or Canada!), somehow regain control of the Panama Canal, or reduce US support for NATO? None of Trump's recent statements on these topics are meaningless, but they should not be taken literally. Again, Trump wants to get what he thinks (and what he can present as) a "better" deal for the US. If he doesn't say what that means now, it only means he is open to suggestions - or he may simply define any endpoint as a strategic victory.
This is exactly what happened during Trump's first administration, when NAFTA (the North American Free Trade Agreement) was renegotiated with Mexico and Canada. Trump initially threatened to tear up NAFTA "on day one". In the end, he agreed to minor changes (including a change in the rules of origin in a way that was acceptable to all parties) and a rebranding that turned NAFTA into the USMCA (United States-Mexico-Canada Agreement).
There is a broader reshaping of the world, but it has nothing to do with the incoming administration, which is unlikely to respond effectively. For example, Trump still uses bellicose language to oppose China and Iran, but both countries are already in poor economic shape and pose little threat to regional order—let alone international peace. And as he did in his first term, Trump is promising to withdraw from foreign interventions (then in Afghanistan and Iraq, now in Ukraine). But Russia’s need for drones and missiles to fire at Ukraine has made President Vladimir Putin completely subservient to China. Do Trump (and the Republican Congress) really want to hand a weakened President Xi Jinping an illegitimate and bloody victory in Ukraine?
What American voters really care about are good jobs and the cost of living. But Trump’s “populist” agenda—an ephemeral agenda fueled by fear of imagined enemies—is doomed to failure. Trump inherits a strong economy, but the policies he has signed into law will do little good for less educated workers or significantly improve the lives of most other Americans. Instead, the rich will get richer, the richest will get even richer, and everyone else will likely struggle with higher inflation, cuts to public services, and the fallout from rampant deregulation.
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Simon Johnson is the 2024 Nobel laureate in economics. and former chief economist of the International Monetary Fund, professor at the MIT Sloan School of Management, director of the MIT “Shaping the Future of Work” initiative, and co-chair of the CFA Institute’s Systemic Risk Council.
translation: Nick Iliev